Canadian Underwriter


July 31, 2013   by Craig Harris

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In what will surely become the most expensive insured loss in Canadian history, extreme flooding in Southern Alberta in late June caused massive damage to homes, businesses and public infrastructure, resulting in 27 local states of emergency, four deaths and early estimates of total insured losses well above $1 billion. Total economic damages could reach $5 billion or more.

Just as adjusters and contractors were scrambling to handle claims from the Southern Alberta floods, a storm bringing record rainfall hit the Greater Toronto Area (GTA) July 8, slamming the insurance industry with a nasty one-two punch. The ensuing floods inundated highways and local roads, shut down power to more than 300,000 people and damaged hundreds of residential and commercial properties, particularly basement structures. The first estimate of insured losses from the storm was released in mid-August by Property Claims Services Canada at more than $850 million.

In Southern Alberta, torrential rainfall over June 19-20 caused a massive increase in the flow rate of several rivers, including the Bow and Elbow Rivers into Calgary. Significant flooding prompted evacuation orders for more than 100,000 residents from their homes. Flooding reached up to the 10th row of the 19,000-seat Saddledome, home to the NHL’s Calgary Flames. The grounds of the annual Calgary Stampede were also severely damaged, although the tradition continued as the city banded together and hosted the world-famous event in July.

Most residents have now returned to their homes and initiated the process of inspection, damage assessment and insurance appraisal/claim filing. In severely affected areas, such as High River, this process is ongoing.

Approximately 5,000 insurance/claims personnel were deployed in the region, including rapid response from several members of the Canadian Independent Adjusters’ Association. The CIAA reminded insurers and other partners that it is equipped to mobilize their Catastrophic Response Team to the affected communities as a result of the devastating events in Southern Alberta. The team provides instant electronic access to independent adjusters when catastrophic events strain company resources, as well as an expedited licensing process for the seamless mobility of adjusters in times of emergency.

One early estimate of total economic losses by BMO Capital Markets put the preliminary damage from the Alberta floods between $3-5 billion. A.M. Best estimates total insured losses somewhere between $1- 3.75 billion. A preliminary report from Property Claims Services Canada was cited by Alberta Premier Alison Redford in late July estimating insured losses of $1.3 billion. Insurance sources say that number will certainly rise in the months ahead as the claims situation is fluid and developing.

The dry numbers do little to paint a picture of the devastation in many cities and communities in Southern Alberta. David Riddell, president of Calgary-based adjusting firm Canadian Claims Services, says the flooding really started on Wednesday, June 19. With his main office outside of the mandatory evacuation zone, he made the call to keep his headquarters open that weekend and even extended his boardroom facilities to a local broker partner.

“The level of flooding and the number of people affected were unprecedented,” Riddell says. “In certain areas of Calgary, such as Elbow Park and Riverdale, it was like a war zone. Access was difficult or restricted by emergency personnel. Our adjusters had to park their cars, and then make their way on foot past debris.”

Mike Koch, national property/catastrophe manager, Crawford and Company (Adjusters) Inc., happened to be in Calgary in mid-June on a branch visit. “I can recall going down to one of the bridges over the Bow River and seeing the water coming up to the trusses, with all these swirling eddies and a strong undertow,” Koch says. “I looked at my colleague and we both said, “this is going to be bad.’ We were right.”

Calgary was hit hard, particularly communities like Inglewood and Sunnyside. However, the city seemed to recover fairly quickly and got its businesses and residents back on their feet as quickly as possible.

Other areas, such as High River, were not as fortunate. The Alberta government lifted the local state of emergency in High River July 12, a little more than three weeks after the initial flooding. Many residents, such as those in the community of Hampton Hills, returned to find severe damage and, in many cases, uninhabitable properties. Mould and the dangers of disturbing asbestos in any rapid teardown became very real concerns in the weeks following the flood, and continue to this day.

“We did not have access to High River until one week after the flood,” says Michael Morris, vice president, national operations for Cunningham Lindsey. “And when we did get in, there were some health issues for our adjusters to contend with, such as mould, structural safety of the buildings and potential asbestos issues. We had to make sure our adjusters were properly prepared. Many of the personal and commercial properties were total losses.”

“There were some areas, such as High River, that were blocked off for several weeks and under civil authority in a state of emergency,” notes Trent Buchanan, Granite Claims’ Kelowna branch manager, who prepared the firm’s Calgary Command Centre. “Getting to the affected areas was a typical challenge. In some cases, roads were closed and our adjusters could not get in.”

It was not just access that presented challenges for adjusters on the scene in Southern Alberta. Coverage for homeowners varied according to the wordings and applications of the individual insurance company. While overland flood is clearly not covered under such policies, sewer backup is available via endorsement. However, the wordings for sewer backup are not consistent from one insurance company to the next.

“There was and still is confusion about how insurance policies will respond to the situation,” Riddell says. “It has been well documented that some insurers are covering in part or in whole sewer backup, while other companies have stuck closely to policy wordings and denied certain claims. This has generated a lot of questions from consumers.”

Widespread media reports and social media commentary pointed to consumer confusion and, in some cases, visible anger with denied claims. Several insurance companies were targets of so-called “name and shame” public campaigns with the aim of trying to get companies to change their positions on coverage decisions.

One of the main sources of ambiguity involved the interpretation of direct/indirect wording related to water damage and sewer backup. Some insurers had the following descriptions of excluded coverage in their homeowner insurance policies: “Any loss, damage or expense caused directly or indirectly by flood reaching your premises . . . even if that cause of loss operates concurrently or sequentially in combination with other causes of loss or damage that are insured.”

The ongoing question for many was whether companies would stick rigidly to this, or be flexible in interpretation to benefit policyholders. Some insurers reconsidered the strict application of this wording and covered claims for sewer backup. In other cases, insurance companies have applied this wording, at least partly due to treaty agreements with their reinsurers.

“Insurers had to determine how their own coverage applied in certain situations,” Koch says. “You essentially had three moving parts. One, where there was clear evidence of overland flood, it was a denied claim situation. If there was a concurrent cause issue, where you couldn’t tell if it was overland flood or sewer backup, some insurers were granting coverage, as clearly as they could separate the two. For example, this could be up to the floor joists of the basement. And third, if it was clearly sewer backup and coverage was purchased, the insurers covered it according to the terms and conditions of their policies.”

Sources note that they are contracted to handle losses according to the instructions of their insurer clients.

“As independent adjusters, we have to adjust claims according to the client’s instructions and under the terms and conditions of the policy,” Morris says. “Policies are different and we had to assess each loss on an individual basis. In some cases, the cause of the loss could have been from multiple sources.”

“As adjusters we are given different instructions on how to handle claims,” echoes Buchanan. “In fact, that may have altered over the course of the flooding from late June to July. Some insurance companies took a second look at their initial response and decide to extend sewer backup coverage in certain situations.”

Buchanan adds that “the key thing for adjusters was remaining completely flexible and gathering the right information the first time, so you didn’t have to keep going back. If a company changed its coverage position, you could use that information to determine if a particular claim was going to be covered. In some cases, it was obvious – if you have 8 feet of water outside your door, then it is overland flood. But in other cases it involved a more careful damage assessment.”

For those not covered by insurance, the Alberta government announced details of its Disaster Recovery Program (DRP) on July 28. The DRP provides financial assistance for uninsurable property damage, loss and other expenses to homeowners and tenants, not-for-profit organizations, institutions and condo associations, small businesses (20 or less full-time employees) and agricultural producers. The government also gave details of the funding formula for determining financial assistance payments.

Alberta Finance Minister Doug Horner confirmed that funding under the DRP for homeowners will be apart from any amounts received as insurance payments. However, each case will be judged individually – there could be a claw-back if insurance covered something also eligible under the DRP.

“We are getting a lot of questions about the government’s DRP and how that will apply to uncovered losses, so there is a fair amount of confusion,” says Riddell. “Some people have already started to tear down and even rebuild. How that will play out with mould, remediation, and policy decisions about rebuilding in flood hazard areas is very tough to figure out. It is becoming a bit clearer, but there are still lots of questions about the DRP and insurance coverage.”

Another source of personal claims in the Alberta flood was damage to automobiles. Water damage to cars is usually covered if comprehensive or all-perils car insurance coverage has been purchased, although this coverage is not mandatory. Again, this coverage is being determined by insurance companies on a case-by-case basis.

In early August, Insurance Bureau of Canada launched VIN Verify, an online, searchable database of vehicles reported as damaged and branded as non-repairable due to flood. With help from participating member companies and government agencies, the list will help keep disaster-damaged vehicles off the roads and protect Canadian consumers. Drivers can use this free service to check whether a vehicle has been reported as non-repairable.

On the commercial side, sources say the assessment and claims process has been clearer due to the prevalence of overland flood insurance coverage for businesses, particularly medium to large clients. There was extensive damage to commercial property, particularly to mechanical equipment, electrical systems, elevators and vehicles – all of which tend to be on lower floors of buildings.

In addition, business interruption policies, which typically “piggyback” on commercial property coverage, are being applied to individual situations. B.I. policies are normally triggered when there is a physical loss directly caused by a named peril in the policy. There has been some debate about the “proximate cause” of the loss and whether damage was caused by flood or other sources, although adjusters say they have experienced few problems or delays on the commercial side.

“I think the commercial coverage has been more straightforward,” notes Morris.

“Commercial claims all flowed in about the same time, whether small, medium or larger businesses,” Koch says. “Every business insurance policy has its own terms and conditions; they are very specific to the individual insurer.”

One area of stated concern for the Alberta government has been the recovery of small business. Initial estimates are that up to 1,500 small businesses were directly damaged by the floods. As well, about 800 not-for-profit groups, First Nation businesses and agricultural enterprises were affected. Industry figures show that approximately half of small businesses have purchased overland flood coverage.

On July 23, Minister Horner announced a financial assistance program for small businesses, agricultural producers and not-for-profit groups called “Hand-Up.” The plan involves two loan and interest rebate programs guaranteed by the province and offered through financial institutions and the Agriculture Financial Services Corporation (AFSC).

A separate Small Business Rebuilding program was also announced by Minister Horner. This program, which is complementary to the government’s DRP and Hand-up Plan, applies to small businesses with 21 to 50 full time employees and gross revenues less than $15 million. The businesses must have been operating in the flood hazard zone and suffered direct damage from the flood.

In general, adjusters say the situation in Alberta is slowly but surely stabilizing, as the province looks to medium-term recovery. The insurance industry is playing a key role in that recovery as the damage covered by private insurance versus government assistance gradually becomes clarified.

“At Crawford, we had a team of CAT adjusters on the ground plus our local branch has stepped up to the plate,” Koch says. “The claims are progressing as they should given the magnitude of the event.

Riddell observes that the flood presented a real-life test to the resilience of the residents of Southern Alberta, as well as to the insurance industry. “It has been an interesting exercise,” he notes. “In my discussions with insurance companies, which have been daily to several times weekly, people are already starting to ask what lessons we have learned as an industry. What could we have done differently or better? One thing that has stood out is the importance of business continuity plans, especially for us as adjusters.”

The GTA rainstorm on July 8 represented a markedly different CAT event than the Southern Alberta flooding. With record rainfalls that even exceeded the amount dropped by Hurricane Hazel in 1954, the flash flood that ensued was intense but short-lived, as opposed to the lengthy damage caused by the river surges in Alberta. The majority of damage in the GTA occurred to roadways, public infrastructure and residential properties, particularly basements.

“Speaking for Cunningham Lindsey, the majority of claims we have seen are for sewer backup to residential properties,” Morris observes. “While the vast majority of claims came in within the first 72 hours, we are still seeing some late losses being reported.”

Sources note that one of the more pressing issues post-flood in the GTA was the number of qualified contractors, who were already stretched thin by the Alberta surge in demand for restoration work. In some cases, contractors from Atlantic Canada and Quebec have stepped in to help with emergency restoration and recovery efforts.

“You can imagine that a lot of contractors had gone out to Calgary and had to re-deploy back to Toronto to respond to the situation there,” Crawford’s Koch says. “There have been some challenges with contractors and availability, especially when it comes to basements, which today are both living and storage spaces.”

With the extensive damage wrought by both the Southern Alberta and GTA flooding, one thing is for certain – the issue of sev
ere weather and water damage has become a major issue for politicians, consumers and the media. One of the buzzwords that quickly emerged from the flood aftermath is mitigation, followed closely by infrastructure.

It didn’t take Alberta Premier Alison Redford long to make policy changes to the province’s disaster assistance program, along with future mitigation measures. On July 12, her government announced a new approach to flooding that includes terms and conditions on eligibility for disaster relief in “flood risk” and “flood fringe” designated areas of Alberta. Specifically, the new measures outlined that:

• Funding from the Disaster Recovery Program (DRP) will be available to homeowners within a floodway for rebuilding or relocating to a new location outside a flood risk area;

• Funding from the DRP will be available for specific mitigation infrastructure to protect buildings in flood fringe areas;

• Any land made available by Albertans moving out of flood risk areas will be used for municipal flood mitigation or public recreational use;

• In addition to the eligible expenses, additional funding will be available for people with heavily damaged homes in flood fringe areas to use for flood mitigation purposes;

• Homeowners in a flood fringe who do not implement mitigation measures to protect against a 1-in-100 flood event will not be eligible for DRP funding in the event of future flooding (homes and businesses currently in floodways, and those who utilize DRP funds, will have a notation on their land title to ensure future owners of the land are also informed); and

• Legislative changes that the government will introduce in the fall will require municipalities to no longer approve future development in floodways.

In the aftermath of the Sothern Alberta floods (and to a lesser extent, the GTA flood), public and media discourse made frequent mention of the absence of a national flood insurance program. Indeed, Canada is the only G20 country without such a public-private program for flooding, as most public funds in the past have been directed to disaster relief. As many in the industry already know, a public flood insurance plan is a complex subject, with a range of potential solutions. Many flood programs in other countries, such as the United States and United Kingdom, face high debt loads and require massive infusions of taxpayers’ dollars.

As flood-related losses continue to garner media and political attention, the focus of the insurance industry is increasingly turning to more accurate, sophisticated floodplain mapping and investments in infrastructure (especially sewers and water mains), as well as flood mitigation measures. However, as is the case in Alberta, provincial and municipal zoning laws may need to change to reconsider the costs of building in high-risk flood zones. And post-disaster funding rules on what is and what is not covered under recovery programs would also need to be consistent and well-established. Without clear discussions on these principles, a public-private flood insurance program would be a tough sell.

In the end, someone pays for the damage caused by extensive flooding. Residents, business owners, insurers and governments in Alberta and Ontario (and Ottawa) will be figuring out precisely how and how much in the months and possibly years ahead.